Ross Greenwood speaks to Mortgage and Finance Association of Australia CEO Mike Felton after the federal government has announced it won’t ban mortgage broker trailing in order to maintain competition, despite recommendations from the banking royal commission.
Ross Greenwood: I did play for you earlier a grab by the treasurer today, that is Josh Frydenberg of course, about trailing commissions. Now, understand that there’s been massive backflips by both of the political parties since the royal commissioner, Hayne Royal Commission, was handed down the banking Royal Commission, because in that there were 76 recommendations. Now, I can remember quite specifically, the treasurer walking through, giving briefings in the lockup. He was handing it down saying, “We’re going to implement 75 of these in full. The one we’ve got a question mark over is about mortgage brokers and also about the trailing commissions.”
Now, subsequently what came out, was everybody said, “Oh, they’re both going to try and ban all of the commissions on mortgage products,” which caused outrage in industry, advertising campaigns, all the rest of it. People saying there’d be a lack of competition and yet really handing all the whole mortgage markets straight back to the banks. Then what happens is that Josh Frydenberg says, “Well, we’re going to try and ban the trailing commissions.” On the other side of it, you had Labor say, “Well, actually we’re going to try and ban them all.” Then they did a flip-flop themselves and said, “Well, actually we’re going to ban the trailing commissions, but keep the upfront commissions. We’ll double the upfront commissions to a maximum, 1.1%,” which made me only think that “Well, if you were technically an unscrupulous mortgage broker you’d be churning your clients portfolio as often as you can so you keep on getting the 1.1% of the, let’s say, average half million dollar mortgages that those people were writing.” That to me seems to be the sugar on the table. Well, today the government itself and Josh Freedenberg again did their own backflip of this. Here is Josh Freedenberg.
Josh Frydenberg: We are concerned about the impact on competition in the mortgage lending market. Small lenders and mortgage brokers are absolutely critical part of competition in that market.
Ross Greenwood: Okay. That is the treasurer of today, Josh Frydenberg. The whole point about this is, what they are now saying is that they will retain the trailing commissions as well as those upfront commissions. That will be music to the ears of the mortgage broking industry. Now Mike Felton is a chief executive of the Mortgage and Finance Association of Australia that represents around 13,500 mortgage brokers around the country. He is on the line. Mike, many thanks for your time.
Interview with: Mike Felton, CEO, Mortgage and Finance Association of Australia
Mike Felton: Hi, good evening. Thanks for having me.
Ross Greenwood: Is this the outcome you wanted from the federal government?
Mike Felton: Yes, it certainly is. We have been saying for some time Ross, that the case has not been made for the removal of trail. We feel it has not been demonstrated that trail leads to queer outcomes. When you, in fact, look at what actually Treasury have been saying for some time they’ve been saying that in fact it incentivizes higher quality loans and disincentivizes that churn or unnecessary refinancing that you talked about. Just quickly if you look at what Treasury, in fact putting their submission to the Royal Commission last October, they said that the conflicts, that do naturally exist and that need to be managed within our industry, would, in fact, be worse in the absence of control mechanisms such as trail. We think it’s a good outcome and good for consumers’ outcome.
Ross Greenwood: I thought that many of your members thought that they were actually deferred, upfront fees. What’s the distinction between a trailing commission and a deferred, upfront fee?
Mike Felton: Well, it is certainly there’s a lot of misunderstanding between trail and the ongoing commissions in other industries. Of course in our industry, it’s paid by the mortgage, by the lender. In fact many years ago was paid all up front, but a decision was taken by the lenders many years ago that approximately 50% of the economics should become contingent upon a good customer outcome. In fact, that trail was taken from an upfront and then paid over the life, provided the loan did not go into arrears, was not refinanced and couldn’t involve fraud. In essence, making it a control mechanism that aligns the interests of the broker to the customer.
Ross Greenwood: Okay, but the other thing also about that, Mike, is in other industries, financial planning has been the classic. When there were trailing commissions there, which have now been completely banned, it was about providing a fee for some form of remuneration. In other words, the trail was supposed to be there, and I know certainly in many financial planners case they failed to do this. They simply collected the money but provided no service. It was supposed to be there so that somebody is at least looking over your mortgage, making certain that is the best for you and your circumstances, and also that it’s competitive. Is that really the reason why the trail’s here?
Mike Felton: No. We would say it’s part of the original economics and in fact, used to be paid upfront, as I said. At the end of the day, a broker has 70% of their business coming from referrals and existing customers. If they don’t look after the customer and service them on an annual basis, they’ll be out of business pretty quickly and lose those customers to other brokers and lenders. That relationship model is the only way a broker survives so that’s a big incentive to ensure that they are servicing customers.
Ross Greenwood: Okay. Under these two quite different models now, Labor, which is suggesting there should be an upfront fee of some 1.1%, the coalition now saying that there should be a mix of an upfront fee and a trailing commission, which of these is best from the broker’s point of view?
Mike Felton: We would still say that trail has a very important place in our industry, and we would encourage all sides of politics to look at the previous submissions of both ASICS and Treasury and to look at the outcomes that trail is producing. The industry date on– The date on our industry, Ross, is exceptional. High satisfaction, low compliance, and really, the case has not been made for removal of it. We would encourage all sides of politics to seriously consider continuing with trail and then reviewing it in three years’ time as it’s been suggested. We are a systemically important industry, we know that. We’re not going to hide away from scrutiny, but we don’t believe that the case is being made and neither has it been proved that it’s producing queer outcomes, in fact, quite the contrary.
Ross Greenwood: Does it mean that if I am a customer who does not use a mortgage broker that I should and have justification, for going to my bank if I’m seeking to refinance it and saying, “Listen, whatever rate you’ve got, and I presume you’re going to be competitive, I want you to give me a check for $5,500 because I’m not using a mortgage broker, because if I used a mortgage broker rather than actually coming to you directly, you would have paid $5,500 out on $1,000,000 mortgage, which is 0.55%. You would have paid that out to the mortgage broker so why don’t you give some of that back to me?”
Mike Felton: Well, I think the economics between the various channels that been proved to stand on their own two feet in terms of the outcome. The customer’s not being penalized in any way in terms of the interest rate. When a customer goes into a branch they really do have the choice of 1 series of products rather than the average 34 products that Deloitte Access Economics that a broker has.
Ross Greenwood: You get my point, don’t you? That is, if I say, for example– If a big bank, say, for example, is paying 0.55%, which is pretty typical, which on $1,000,000 mortgage is $5,500. Now, if I go to a broker and I get that deal, the broker gets $5,500, but if I go straight to the bank branch and actually buy from the bank branch, they certainly don’t offer me $5,500 for the business, do they?
Mike Felton: No, they don’t, but it is the fee paid by the lender. The customer at the end of the day is no worse off and they are getting a highly considered outcome to meet their given circumstances and needs.
Ross Greenwood: In other words, what you’re saying to me is, you’re probably better off using a mortgage broker rather than trying to do it yourself. Mainly because you get no worse outcome as a result of it, and if the bank is stupid enough to go on pay out the $5,500 to the mortgage broker rather than doing it themselves, well, you should as a consumer probably let them do that?
Mike Felton: Well, in terms of what a broker– what a customer gets through a broker, a broker has an average 13.8 years industry experience, and as I said, an average 34 lenders to help navigate the customer through what is a very complex process. We see that on its own merits as standing up, but certainly, the economics of the channel, many lenders only use brokers and find it a highly efficient and reliable and scalable channel from which to be able to distribute their product. That has driven the competition that all customers right around Australia are now benefiting from, with a 3% decline in net interest margin, largely attributed to brokers over the last 20 to 30 years.
Ross Greenwood: Mike, finally, does this mean also that brokers in the future, do you believe will be more subject to responsible lending laws rather than simply leaving it to the banks and the building societies and credit unions to work out whether a person is suitable to have credit applied to them, because surely now the mortgage broker, as my advisor on this loan, surely has got to have some responsibility as well?
Mike Felton: Ross, brokers have always been under responsible lending legislation. They’ve had to beat that legislation for many years now and we would see the regulation continuing, and the scrutiny continuing. It’s appropriate given the systemic importance of our industry. 60% of all loans are now concluded through a mortgage broker. Our industry doesn’t hide from that strategy, from that scrutiny rather, and is producing really good outcomes. It has strong data, as I mentioned before.
Ross Greenwood: Mike Felton is the chief executive of the Mortgage and Finance Association of Australia. That comes off the back of a decision today by the federal government to maintain the existing situation with payments to mortgage brokers, of not just the upfront commissions, but also the ongoing trailing fees as well. Mike Felton, I appreciate your time.
Mike Felton: Thank you.
Ross Greenwood: Mike Felton, there.
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